Archives: Balanced Portfolio

Below are links to the archives to the Sample Balanced Portfolio and summaries from prior quarters.

When investing we are always having to deal with future unknown events and outcomes, but with the power of hindsight we can often gain a greater understanding of an investment approach that can aid us with future investment decisions. By reviewing the portfolio and summaries from past quarters, you can judge for yourself if the discussions and concerns were relavent or not, at the time they were writen.

Note: The following links to the archives are intended to provide practical examples of the application of the InvestingForMefinancial and investment management process. They are not investment recommendations or solicitations to invest.

The Sample Balanced Portfolio began with an investment of $100,000 in June 2010.

Between July 1st, 2016 and June 30th, 2017, the portfolio increased in value by $3,603.07. The increase in value can be attributed to the receipt of approximately $4,994.43 in interest and dividend income, which was partially offset by a declineof $1,391.36 in the market values for the bonds, preferred and common shares.

In the sixth year, the portfolio generated a 2.67% rate of return and it averaged a 4.77% annual rate of return over the last 7 years.

Maturity: On November 15th, the portfolio's $7,500 Coastal Community Credit Union Guaranteed Investment Certificate matured and was deposited, along with interest earned, into the account.

Sold 176 common shares of Transalta (TA) at $5.78 per share. The investment's book value was $3,461.88. The sale crystallized a Capital Loss of $2,444.60. At the time of the sale the share's dividend was $0.16 per share, per year, for a yield of 2.76%

Bought 175 common shares of Transalta Renewables Inc. (RNW) at $14.70 per share. The shares pay a dividend of $0.88 per share per year, for a yield of 5.99%

In June, the portfolio had a HSBC Bank Guaranteed Investment Certificate mature. The proceeds, principal and interest, were added to the portfolio's cash balance. In the coming months, we will be looking for suitable investments to buy.

For the 12 months ending June 30, 2015, the Sample Balanced portfolio increased in value by $5,135.33 - for a positive 4.06% rate of return.

In March, the portfolio had it's TD Bank preferred share investment redeemed by the bank at $25.00 per share. The proceeds, plus a small amount of cash, were used to buy preferred shares issued by Canadian Utilities.

Our sample Balanced Investment portfolio ended 2014 with a $8,969.63, or 7.32% increase for the year, which is well which exceeded our target rate of return for the portfolio. With over 70% of the portfolio invested in bonds, GICs, preferred shares and cash, the portfolio's risk adjusted rate of return was impressive.

The price of oil to remain under downward pressure as the world adjusts to abundant supplies and weak growth in demand. In the coming months, we expect an agreement between Iran and western powers to be concluded and this will bring Iranian oil back into world markets - further depressing oil prices in North America and Europe.

We expect the steep decline in oil prices to have a negative impact on the Canadian economy and those of the energy producing provinces.

If oil prices remain at current levels, or go lower, for a prolonged period, the earnings of our Canadian banks will be negatively impacted.

We are watching the Greek Elections with great interest. Social and economic conditions are so bad in Greece that they may be the first in a series of European states to elect an anti-Euro government. The elections might create a whole new level of uncertainty to the European arena.

Our IFM Sample Balanced Portfolio just completed its 4th year of operation on June 30, 2013, and so now seems like a good time to review its performance to date and discuss our next options in terms of where the market looks like it’s headed on the basis of past market cycles.

Currently stock markets around the world have pushed past previous market peaks and continue to push for new highs. History demonstrates that as stock markets break to new highs investors are best served by focusing on their long-term asset allocation and re-balancing frequently. Investors that allow greed to dictate their asset allocation often suffer outsized investment losses when stock markets eventually peak out.

Fortis Inc. redeemed the portfolio’s investment in the Series C, preferred shares, on July 10, 2013 at $25.00, plus accrued dividends of $0.1456, per share.

To replace the redeemed preferred shares, the portfolio purchased 210 perpetual preferred shares issued by Power Corporation at a price of $24.73 each. These shares provide an annual yield equal to 5.66%.

Using most of the portfolio’s accumulated income, the portfolio invested in a $6,000 par value, bond issued by TMX Group Limited. The bond will mature on October 3, 2018 and pays a semi-annual yield equal to 3.096%. This bond fills a gap in the portfolio’s fixed income maturity ladder.

For the 12-month period, ending June 30, 2013, the portfolio’s earnings were generated by

$4,275.60 in interest and dividend income and

$1,019.47 in capital gains.

The portfolio began the same 12-month period with a market value of $114,348.34 and it finished with a market value of $119,643.41.

The portfolio’s effective stock market exposure began at 12.84% (July 1, 2012) and ended at 17.50% (June 30, 2013) – well under its target stock market exposure of 30.0%.

The balanced portfolio’s current market value ($119,643.41) finished the 12-month period slightly above the upper level of its benchmark ($119,101.00), but well above the lower benchmark level ($112,486.00).

Each sample investment portfolio held a Bank of Nova Scotia GIC maturing on June 21, 2013. Both the GIC’s principal and final interest payment were credited to each portfolio’s account cash balance.

The GIC was originally purchased on June 21, 2010 as part of our initial bond maturity schedule – this GIC represented the 3rd year of a maturity schedule/ladder that ranged from 1 to 9 years. (Our original 9-year maturity is now our 6-year maturity, yielding 4.16%.)

At the time of purchase, a 3-year GIC offered a much better yield to maturity than any comparable regular bond with the same maturity.

Flattening yield curves: As mentioned above, we note the Canadian bond yield curves are once again flattening indicating the economy is slowing and financial markets are not at all concerned with a threat of inflation. In fact the flattening of the curve and the lower long-term yields curves seem to indicate inflation will continue to decline, not increase. For example, below are the interest rate spreads (1 year to 30 Year bonds) and the 30-year yield for the past few years.

2010 – Interest spread = 3.31%, 30-year = 3.96%

2011 – Interest spread = 1.88%, 30-year = 3.57%

2012 – Interest spread = 1.58%, 30-year = 2.50%

2013 – Interest spread = 1.24%, 30-year = 2.34%

As can be seen the spreads are decreasing, causing the yield curve to flatten, and the overall trend for Canadian interest rates is down. o Even with all of the talk of interest rates rising, the bond market would appear to disagree. Note: For a discussion on Yield Curves, visit our Classroom – Bonds section.

Each portfolio has a cash balance, which for the most part represents the dividend and interest income earned from the investments held, plus the maturity proceeds from the Bell Canada Bond. In reviewing the portfolio and given the current economic and investment climate, we are more comfortable investing in a fixed income investment – Bond, Guaranteed Investment Certificate (GIC) or Preferred Shares. (Even though we are currently under-weight Growth investments in the Balanced Portfolio.)

We have decided to reduce Balanced Portfolio’s investment in the common shares of Enbridge Inc. by selling 38 shares at $38.52 each.

Why are you selling the shares? We are not selling all of the shares of Enbridge Inc. just simply reducing the portfolio’s investment back to its original amount - $2,692.44. By selling the 38 shares and moving the proceeds into fixed income investments, we are crystallizing and safeguarding the profit. This is consistent with the Investment Policy Statement governing the management of the portfolio.

We have decided to buy additional shares of Transalta Corp. Using a portion of the Sample Balanced Investment Portfolio’s cash balance, we have invested $790.92 to purchase an additional 52 shares. Why buy more shares now? For a couple of reasons.....

For a brief discussion of the portfolio’s past annual performance visit the Performance Summary section.

For the quarter ending June 30, 2012, the balanced portfolio generated a positive investment return of 1.35% - its eighth straight positive quarterly investment return. Fortunately, the balanced portfolio is managed and measured to it’s own ‘benchmark’ – see the Annual Projections section. The positive quarterly returns have helped the portfolio to exceed the goals set for it total market value.

Note: According to Morningstar.ca, the Morningstar Canadian Equity and Canadian Focused Equity fund indices lost 5.4% and 5.3%, respectively, for the quarter, despite solid showings in June. And according to Morneau Shepell, the S&P/TSX Composite (Total Return) lost 5.7%.

Inflation Fears: There continues to be a lot of chatter about the threat of inflation, mainly due to the massive expansion of liquidity by governments. This seems to be the only argument used to support the argument for inflation. The growing economic weakness in Europe and China do not support this fear. In fact, if it were not for the recent 36% jump in the price of oil, the official inflation numbers would certainly be much lower and in some instances possible indicating a deflationary direction. Elevated levels of long-term unemployment (Nearly half of the unemployed in the U.S. have been out of work for six months or longer. In the past, corresponding unemployment duration was only 10 weeks.), low Manufacturing Capacity Utilization Rates, the chronically low velocity of money within world economies and the continuing uncertainty in Europe (as evidenced by the weekly government announcements of bail-outs, bank stress-tests, financial firewalls, etc.) are all helping to keep inflation at bay.

The sample portfolio has a Province of Ontario Discount Bond, in the amount of $14,109.00, maturing on December 2, 2011. We have allocated the maturity proceeds into three individual investments as follows....

Bond yields are now lower than dividend yields. This is a new dynamic for this generation of investors. Prior to 1958, bond yields were typically below the dividend yields paid by stocks, but in 1958 this relationship changed as investors began to believe in capital gains as an investment reward. From 1958 until recently investors were willing to accept a lower and lower dividend yield from their stock market investments as they focused more and more upon capital gains as the true reward. Now investors are more focused upon regular, reliable and consistent investment incomes as the motivation for their investment decision. For this generation of investors this is a new shift in the investing dynamic.

Given the continuing civil unrest in the Middle East, the economic weakness in Japan and the rising financial turmoil in Europe, we felt more comfortable with a smaller exposure to the stock markets. Even though we wanted to reduce our stock market exposure, we did not want sell any of our current common share investments, which would subsequently reduce the portfolio’s dividend income stream. We therefore decided to add a small position in an inverse ETF.

European and Irish sovereign credit concerns continue with larger government agencies and central banks once again injecting additional taxpayer capital. The credit difficulties in Greece, Ireland and Portugal were overshadowed by the turmoil in the Middle East and the disasters in Japan, during the quarter. The bond markets have pushed the bond yields for these three sovereign states to new highs, indicating that their financial problems have not been resolved.

European and Irish sovereign credit concerns continue to make headlines with larger government agencies and central banks once again injecting additional taxpayer capital. The lender of last resort now appears to be the largest countries as these appear to have the greater borrowing capacity. These actions continue to be necessary as the financial system continues to work its' way through a credit contraction cycle. In the United States, the Federal Reserve and Treasury Dept. announced another round of Quantitative Easing (QE) that will last until June 30, 2011.

We continue to feel Canadian investors should remain cautious with a hopeful bias. One of the casualties of the financial crisis has been the disconnect and divergence between stock markets and the underlying fundamentals - unemployment, bankruptcies, GAPP earnings, etc. This may be due to the increased difficulty in analysing corporate balance sheets and various economic indicators. Sock markets no longer look to the economy for their 'direction', but rather government policy announcements and the central banks' continued gift of 'free money' for the world's financial systems. As a result, the stock markets are driven by technical trading - following the latest money flows with a focus on specific investment themes- commodities and higher-risk assets.

The following Sample Balanced Portfolio was started on June 21, 2010 with $100,000.00 invested. All interest and dividend income received is credited to the account and maintained as a cash balance. The income is assumed to be retained and reinvested by the portfolio, as per the Investment Policy Statement (IPS).

Securities or investment strategies mentioned in the InvestingForMe website may not be suitable for all investors or investment portfolios. The information contained in this website is not intended as a recommendation directed to a particular investor or class of investors and is not intended as a recommendation in view of the particular circumstances of a specific investor, class of investors or a specific portfolio. You should not take any action with respect to any securities or investment strategy mentioned in this website without first consulting your own investment criteria and financial circumstances in order to ascertain whether the securities or investment strategy mentioned are suitable in your particular circumstances. This information is not a substitute for obtaining professional advice. The commentary, opinions and conclusions, if any, included in this website represent the personal and subjective views of the writer who is not employed as an analyst and do not purport to represent the views of Investing For Me Education Inc. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither Investing For Me Education Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. The information on this website is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. The information contained in InvestingForMe’s website is furnished on the basis and understanding that neither Investing For Me Education Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. InvestingForMe.com is a website owned and operated by Investing For Me Education Inc. for educational purposes only. Used under license.

+ Performance of the Sample Portfolios (Balanced and Income) does not take into consideration management fees, transactions costs or other account expenses that investors might incur. Past performance may not be repeated.